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Be careful what you agree to (City of San Marcos v. Loma San Marcos, LLC)

Why It matters: The Court of Appeal affirmed the trial court decision upholding an agreement between the City of San Marcos and a property owner that required the property owner to pay over $2 million in impact mitigation fees for a project that was never built. The Court rejected the property owner’s arguments that (1) the fees were not due because the City had yet to issue building permits, (2) the agreement was unenforceable because it was not supported by valid consideration and (3) even if the fees violated the Mitigation Fee Act and takings clause of the Fifth Amendment the agreement was valid and enforceable by its terms.

Facts: Loma San Marcos purchased a vacant 15-acre property that previously had been used as a recycling facility, subject to a security and lien agreement with the City of San Marcos (City). The agreement was entered into by the property’s former owner to securitize fees due pursuant to a conditional use permit (CUP) approved by the City in 2004 that allowed the owners to convert the property from a recycling facility to an entertainment production facility and office complex. The CUP was conditioned on the prior owner’s agreement to pay public facility fees and to pay a fair share contribution towards improvements to roadways and public infrastructure off-site.

Under the security and lien agreement, the property owner was obligated to pay the City a street improvement fair share payment of $1,116,000 million to mitigate impacts for improvements required on two adjacent roads and a public facility fee of $1,238,198 by a specified date. If the property was not sold by the end of 2006, either the property owner or the City could terminate the agreement and the owner would not be liable for the fees. Upon any breach, the owner’s rights under the CUP would terminate and upon the issuance of termination, unpaid fees would constitute a lien against the property. After purchasing the property and negotiating an amendment to the agreement extending the payment deadlines, Loma San Marcos failed to pay the fees. In October 2009, after several attempts to get Loma San Marcos to satisfy its payment obligations, the City sent a demand letter for performance of the obligations under the amended agreement to pay $2,390,625 plus interest. Loma San Marcos took no action, and under the terms of the agreement the City brought a judicial foreclosure action. Loma San Marcos cross-complained, seeking rescission of the amended agreement. After trial, the court entered judgment in favor of the City.

The Decision: The Court of Appeal reviewed the trial court’s decision and considered the enforceability of the amended agreement and Loma San Marcos’s claims under the Mitigation Fee Act and takings clause. The following is a summary of the opinion of the Court of Appeal.

Agreement to Pay Fees Was Not Superseded by the Terms of the CUP. The Court rejected Loma San Marcos’s argument that the agreement could not supersede the CUP, which expressly stated that building fees were not due until building permits were issued. The Court explained that the CUP did not prevent the parties from entering an agreement to alter the timing of paying the impact mitigation fees, and agreeing to pay the negotiated fees before the issuance of permits.

The CUP Had Not Expired at the Time of the Amendment. Loma San Marcos also argued that because the CUP had expired and was invalid at the time the amended agreement was executed, insufficient consideration supported the agreement. The Court concluded that substantial evidence supported the trial court’s finding that the CUP remained valid when the amended agreement was executed. While the CUP stated that the CUP would expire 12 months after its approval, the City Manager had extended the CUP by way of a letter to Loma San Marcos, and evidence of the parties’ conduct showed that Loma San Marcos was at all relevant times entitled to use the property as a film studio.

The Mitigation Fee Act and Takings. The Court went on to address Loma San Marcos’s claims under the Mitigation Fee Act and the takings clause of the United States Constitution. The Court held that the prior owner waived its right to challenge the fee conditions by negotiating and agreeing to the fees. Loma San Marcos purchased the property subject to the agreement and reaffirmed its own agreement to pay by entering into the amended agreement. Even if Loma San Marcos could challenge the fees, the Court concluded the City met its burden to show there was a reasonable relationship between the impacts that were projected from the new development and the public facilities financed in the City’s public facilities fee plan and the street improvement fair share payments. The City also adequately showed a rough proportionality between the public impact of the land use change and the fees. In addition, at the time the payments were determined, the property had sat vacant for more than eight years, and prior fee payments did not offset mitigation fees assessed for the approved new use.

The Court concluded that Loma San Marcos, represented by sophisticated real estate investors, entered a binding agreement with the City to pay the fees or face foreclosure and should be held to the terms of that agreement.

Practice Pointers:

Beware, a negotiated mitigation agreement accelerating the timing of payment of mitigation fees and other development obligations contemplated in a development permit may be enforceable notwithstanding the fact that the project creating the impacts was never constructed.

Careful drafting could have avoided this result. Make certain that any agreements accurately reflect the parties’ understanding and protect the client from unintended consequences should the project not move forward.

As a subsequent purchaser of property, be meticulous in conducting due diligence and reviewing recorded documents and entitlements.

Compare jurisdictions: Arbitration

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